Parallel universe

Channel Middle East examines the two most critical aspects of grey market trading in the region: the factors that cause it and how it can be controlled.

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By  Andrew Seymour Published  November 1, 2006

|~|Manish-Bakshi-BenQ.jpg|~|Manish Bakshi, BenQ|~|Powered by globalisation — and virtually impossible to measure — the flow of grey product is a phenomenon that threatens any authorised channel which plays by the rules. Such are the intricacies of parallel importing in this region that you could probably fill a book spanning a thousand pages and still fail to get to the bottom of the subject. But in this article Channel Middle East examines the two most critical aspects of grey market trading: the factors that cause it and the ways in which it can be controlled. Contrary to popular opinion, the grey market is actually pretty simple to define. Any authorised reseller that moves product outside of the territories stipulated in the terms of its contract with a manufacturer is creating a grey market. Or, to put it in a different way, if products remained in the markets where vendors intended them then the grey market would cease to exist. Rarely is it as straightforward as that, however. “What you have to remember is that there are different scales of grey - really starting from cross border grey, where you have legitimate partners irregularly selling products to territories outside of their contract,” said Guido Romagnoli, MEA channel director at networking vendor Cisco. The situation in the Middle East is complicated by the ubiquity of sub-distributors and re-exporters, which means that even if authorised distributors stick to selling into their designated territories there is nothing to prevent the product from being moved onto somewhere it shouldn't be by parties lower down the supply chain. This lack of transparency is regarded as one of the primary catalysts of grey marketing, especially in the Middle East, which enjoys a privileged location close to the manufacturing hubs of the Far East, but also serves as a procurement base for traders in Europe and the US. This also creates a two-way force as grey product is moved out of the Middle East on one hand and brought in from outside the region on the other. Underpinning all this is a vibrant intra-region grey market caused by product being illegitimately moved between countries such as UAE, Iran and the African states. Several channel sources speculate that the existence of free trade zones in places such as Jebel Ali means it is far more likely that the flow of grey product is stronger going out of the Middle East than it is coming in. “There are three cities — London, Hong Kong and Dubai — where the maximum trading happens in the world and that gives rise to a lot of grey importing,” commented Manish Bakshi, general manager MEA, at consumer electronics and monitor vendor BenQ. “But if you look at somewhere like Saudi, grey doesn’t happen as much because of the market nature. The same goes for Egypt, China or India. The tendency of these channels is to buy or sell in-country. They do not open their credit policies to the outside world.” In addition to the three trading cities mentioned by Bakshi, Amsterdam and Singapore are also regarded as key locations in the route that grey product takes through the global supply chain.||**||Physical appearance|~|Gulfem-photo.jpg|~|Gulfem Cakmakci, Seagate|~|Research by KPMG and US-based industry body AGMA back in 2003 revealed that grey market sales of IT products account for over US$40 billion in annual sales and collectively cost IT vendors up to US$5 billion a year in lost profits. At the essence of the grey market is the product itself. Parallel importing only occurs if there is a demand for the commodity or the product is in short supply. That creates a situation where buyers attempt to source product from non-conventional channels or authorised channels that find a sale too hard to resist. The flip side of this scenario is when the channel becomes overstocked with inventory, prompting a surge in grey importing as distributors sell to customers in places they shouldn't just to offload stock. Levels of grey trading in the region are also determined by the physical appearance of the product, with small, fast-moving goods such as components, cameras and boxed software far more susceptible to grey forces than monitors or PC systems. “Grey market traders do not usually work with mid- or high-end products — they take mass distributed products that are easy to move or cash in,” said Amr Hassan, general manager at HP IPG in the Middle East. “If you are a market leader with 65% to 70% of the market then you are obviously more exposed to the problem than others.” The mode of transport also has a key role to play, according to Bakshi at BenQ: “It is widely recognised that air shipments have a higher rate of grey imports than sea freight. With air freight you can have the product in the market the next day, but it can take between 20 and 25 days by sea if a trader is moving it from America to Dubai, for example. By then there is always a risk that the price could have gone down.” A whole series of other elements, which may appear harmless on their own, can also be exploited by companies that have no qualms about using or servicing the grey market. Volume-based partner programmes, unrestrained OEM channels, frequent quarter-end deals and high levels of aging product in the supply chain all contribute to the problem. The proliferation of online communication and the fact that some parts of the world can access particular pricing 12 hours ahead of others remain additional factors that are exploited by parallel importers. Variations in import duties and VAT regulations have a massive impact too, as emphasised by recent reports on the role that Dubai has had to play in rising cases of mobile phone VAT carousels operating out of the UK. Countries such as the UAE, where the import rate is just 5% — and some traders are rumoured to understate the quantities they bring into the country — are much more conducive to grey marketers than places such as India where import taxes of 30% levied on consumer electronics means that the price of the product becomes too expensive to ship into other markets at a profit. ||**||Necessary evil|~|Mario_Veljovic.jpg|~|Mario Veljovic, Aptec|~|One Dubai-based components distributor, with operations across the Middle East, said it is routinely approached by traders in countries such as Poland and the Czech Republic and claims local customs procedures are not effective enough to stem the grey tide: “In some parts of the world, like Europe and the US, the grey market tends to be monitored through some regulations. For instance, look at what some of the major IT vendors have decided to do in the UK and EU — all imports of their products from the outside have to be justified to customs. We are very far away from that happening here. If you look at what the laws are saying, they are quite flexible and so the market is very open.” There is an argument that the grey market is a necessary evil in this region, particularly when it comes to getting products into embargoed countries. Rumours that vendors happily turn a blind eye to such tricks if it inflates their numbers are never far away. One source said: “I think that culturally and historically speaking the Middle East has always been open to the world and is a place where people have a habit of sourcing their products from. The grey market in the Middle East will always have a chance to function, but this is something you have to put in context with the pressure that the vendors are under to hit their numbers. This is a growing market and because other markets are in need of products— and here you can somehow get access to pricing that is below US and European pricing — you are left with the issue of greed. And greed is something that you cannot manage because it comes down to how each person copes with it.” All of this feeds neatly into the factor that is undisputedly regarded as the main reason for grey marketing: pricing. Aside from availability issues, the over-riding motivation for trading in grey circles is because somebody somewhere is offering a product for a more attractive price. If a vendor keeps a differential price structure between two or three countries adjacent to each other, or in different continents, then it is bound to create a grey market. Rashwan Arabi, general manager at UAE-based components and systems wholesaler Computec Class, said: “As a distributor for some important products in the Middle East, I have to understand that a high mark-up on my products will make grey traders dump the same product in my region at lower price, as price is key in IT products.” Gulfem Cakmakci, senior channel sales manager at Seagate Eastern Europe, Middle East and Africa, added: “In the past most of the grey market prices were coming from direct OEM customers. However, we do not see them anymore as the OEM business is more under control today. We do see some cross-regional prices these days, but it is not the same as two years ago when we had a severe problem with cross-regional sales.”||**||Acting local|~|Hassan,-Amr.jpg|~|Amr Hassan, HP|~|While the grey market will never be stopped, there are ways to control its ability to function, particularly when it comes to pricing. Coherent and consistent pricing strategies, supplemented by tightly-managed discount models, are much more likely to discourage parallel importing, while vendors also have a duty to ensure that the local, in-country promotions they run are attractive enough to stop resellers from turning to the grey market. “Distribution needs to fulfil customer demand, wherever it comes from,” said Mario Veljovic, sales and marketing manager at Middle East distributor Aptec. “What the vendors really need to do is find creative and secure models to support local distributors. This whole grey market issue is the challenge of being a global player, but still acting local.” Hard drive giant Seagate claims it has reduced grey marketing activity by changing the way it does business with its distribution partners over the past two years. New reporting systems have replaced the manual way of entering data, while a worldwide pricing strategy and unified approach to channel programmes have been introduced. “We also stop shipments if any distributor has more than five weeks on hand, there are no quarter-end deals and we do not support any cross-regional activity - these have all helped us to limit the grey market in the channel,” revealed Cakmakci. Cisco, meanwhile, has altered its rewards scheme for account managers so that the incentive to authorise deals is no longer volume-driven. The same goes for the distribution channel. “The important thing for us is that nobody is paid on sell-in. We start compensating on sell-out, but only when we know the identity of the reseller that is getting the product, and the customer as well,” said Romagnoli. A strong pricing policy is just one preventative measure. Vendors are also taking steps to introduce more effective support provisions and warranty processes to educate resellers that they should always buy through authorised routes. Western Digital recently launched a service hub in Egypt and has a serial number tracking system in place to ensure that the original location of any faulty drives that are returned can be identified. One common reason cited for the prevalence of grey trading in the Middle East, compared to Europe for example, is the level of resources that vendors have committed to region. Manufacturers with small regional teams tend to be more focused on sales targets and business development than tackling grey market perpetrators. “Grey marketing is more likely to happen when you don't have an organisation on the ground,” acknowledged Romagnoli at Cisco. “In the last 12 to 24 months we have built up quite a big channel team. It’s now north of 80 people in MEA at all different levels — from sales engineers to operational people. This all helps our governance of the grey market.” Bakshi at BenQ echoes that sentiment and warns of the pitfalls of a local structure that is not set up to counteract the unlawful movement of products. “Vendors that have a centralised, rather than decentralised, structure attract grey. If you have just got people sitting in Dubai and controlling the rest of the region on the telephone then it gives a lot of encouragement to the grey market. If the in-country infrastructure is weak in Saudi or Egypt, it tends to lose out to the other brands. Then in a panic the grey market starts.” With global giants such as HP, Microsoft, Cisco and Symantec waging high-profile campaigns against the grey market, and adjusting their go-to-market processes to counter illicit activity, there is every hope that vendors are making a better fist of curbing the problem than they have done in the past. Veljovic at Aptec is one of those who believes this is the case. “I wouldn’t say we have a bigger issue with the grey market than we did this time last year. In fact, it is probably not even in the top 10 reasons of why we lose business,” he said. Grey market activity will never be completely eradicated, but the responsibility rests with vendors to do all they can to ensure that it doesn’t make victims of those who keep to the terms of their contract. ||**||

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